Defined Contribution
Investments Annual Report for Fiscal Year Ended June 30, 2014
.
December 2014 The State Teachers Retirement Board and the associates of STRS Ohio are pleased to present our Defined Contribution Investments Annual Report for fiscal year 2014. This report contains investment information and results from July 1, 2013–June 30, 2014, for STRS Ohio’s defined contribution account allocation choices. U.S. and international stock markets produced strong returns in fiscal year 2014, with the STRS Russell Midcap Index Choice showing the top return at +26.73%. The STRS Russell 1000 Index Choice, STRS Large-Cap Core Choice and the STRS Russell 2000 Index Choice all posted returns in excess of 25% as well for the fiscal year. The STRS MSCI World ex USA Index Choice was close behind with a return of +23.55%. You can read about all of the investment choices in our Performance Section that begins on Page 6. At fiscal year end, total assets for the Defined Contribution Plan and the defined contribution portion of the Combined Plan totaled more than $854 million. Under these plans, STRS Ohio provides allocation choices that members can select to determine the accumulation of their account based on their individual time horizon and risk tolerance. Members enrolled in these plans now have 16 allocation options — all managed by STRS Ohio — ranging from the conservative STRS Money Market Choice to small capitalization choice and an international equity index. These choices allow Defined Contribution Plan and Combined Plan participants to diversify their allocations among various asset classes. STRS Ohio also continues to offer the STRS Total Guaranteed Return Choice. This option offers a guaranteed annual rate of return (3.75% for contributions made in fiscal year 2014) for all allocations made during a given year. In exchange for this protection against market volatility, members must lock in contributions made during the year until the end of a five-year term. The Defined Contribution Investments Annual Report is divided into four sections: (1) the Introductory Section includes this letter and annualized rates of return; (2) the Economic Commentary Section describes economic changes that potentially affected the investment market; (3) the Performance Section details each allocation choice and covers its annual performance; and (4) the Disclosure Section includes key rules, concepts and definitions. As you plan your financial future, we hope you take full advantage of the resources that STRS Ohio and Nationwide Retirement Solutions provide. We at STRS Ohio look forward to working with you throughout your career and partnering with you in helping to build retirement security.
Robert Stein Chair, State Teachers Retirement Board, 2014–2015
Michael J. Nehf Executive Director
Table of Contents Introduction................................................................................................................ 1 Economic and Financial Markets Overview..................................................... 2 Performance STRS Money Market Choice............................................................................... 6 STRS Barclays U.S. Universal Bond Index Choice......................................... 7 STRS Large-Cap Core Choice............................................................................. 8 STRS Russell 1000 Index Choice......................................................................10 STRS Russell Midcap Index Choice................................................................. 12 STRS Russell 2000 Index Choice..................................................................... 14 STRS REIT Choice..................................................................................................16 STRS MSCI World ex USA Index Choice........................................................18 STRS Total Guaranteed Return Choice.........................................................20 STRS Target Choice Options.............................................................................21 Disclosures................................................................................................................22 Glossary of Terms....................................................................................................24
Introduction Investment Performance Report as of June 30, 2014 Annualized Rates of Return
VARIABLE ALLOCATION CHOICES Cash
1 Year
3 Years
5 Years
10 Years
STRS Money Market Choice
0.08%
0.10%
0.08%
1.64%
Index: 90-day U.S. Treasury bill
0.06%
0.07%
0.10%
1.52%
Bonds
1 Year
3 Years
5 Years
10 Years
STRS Barclays U.S. Universal Bond Index ChoiceAB
5.04%
4.04%
5.38%
4.94% 10 Years
Large-Cap
1 Year
3 Years
5 Years
STRS Large-Cap Core Choice
25.06%
14.15%
17.28%
7.06%
Index: Russell 1000 IndexC
25.35%
16.62%
19.25%
7.84%
STRS Russell 1000 Index ChoiceB
25.22%
16.44%
19.06%
8.00%
1 Year
3 Years
5 Years
10 Years
26.73%
N/A
N/A
N/A 10 Years
Mid-Cap
STRS Russell Midcap Index ChoiceB Small-Cap
1 Year
3 Years
5 Years
23.50%
14.37%
19.99%
8.49%
1 Year
3 Years
5 Years
10 Years
STRS REIT Choice
12.82%
11.24%
23.68%
9.60%
Index: FTSE NAREIT Equity REITs IndexD
13.21%
11.93%
24.20%
9.63%
International
1 Year
3 Years
5 Years
10 Years
23.55%
7.21%
11.26%
6.77%
1 Year
3 Years
5 Years
10 Years
STRS Target Choice 2020
14.93%
N/A
N/A
N/A
STRS Target Choice 2025
16.33%
N/A
N/A
N/A
STRS Target Choice 2030
17.74%
N/A
N/A
N/A
STRS Target Choice 2035
19.17%
N/A
N/A
N/A
STRS Target Choice 2040
20.03%
N/A
N/A
N/A
STRS Target Choice 2045
20.03%
N/A
N/A
N/A
STRS Target Choice 2050
20.03%
N/A
N/A
N/A
STRS Russell 2000 Index ChoiceB Specialty/Real Estate
STRS MSCI World ex USA Index ChoiceB
TARGET CHOICE OPTIONS
TOTAL CONTRIBUTION CHOICE Current Rate
Balanced STRS Total Guaranteed Return Choice 2014E
4.00%
(For contributions made between July 1, 2009–June 30, 2010 — closed to new investments)
STRS Total Guaranteed Return Choice 2015E
4.50%
(For contributions made between July 1, 2010–June 30, 2011 — closed to new investments)
STRS Total Guaranteed Return Choice 2016
E
4.25%
(For contributions made between July 1, 2011–June 30, 2012 — closed to new investments)
E
STRS Total Guaranteed Return Choice 2017
3.75%
(For contributions made between July 1, 2012–June 30, 2013 — closed to new investments)
STRS Total Guaranteed Return Choice 2018E
3.75%
(For contributions made between July 1, 2013–June 30, 2014 — closed to new investments)
Historic performance is not necessarily indicative of actual future investment performance, which could differ substantially. A member’s units, when redeemed, may be worth more or less than their original cost. All performance figures are provided net of annual fees. All returns are calculated in U.S. dollars. Current performance may be lower or higher than the performance data indicated above. For current performance data, call Nationwide Retirement Solutions toll-free at 1-866-332-3342 or visit www.strsoh.org. Please refer to the Investment Options Guide for more information about each investment choice, including management fees and risk considerations. A
Effective Nov. 3, 2008, the Lehman Brothers indexes were rebranded to the Barclays Capital indexes.
Performance figures for the STRS Index choices reflect the deduction of management fees. The corresponding indexes are unmanaged, do not incur fees and cannot be invested in directly. B
C
The performance is based on the Russell 200 Index until June 30, 2005, and the performance of the Russell 1000 Index after that date.
FTSE NAREIT Equity REITs Index is effective beginning July 1, 2012. From July 1, 2007, through June 30, 2012, the Wilshire REIT float-adjusted index was in effect. From July 1, 2002, through June 30, 2007, the Dow Jones Wilshire REIT full-cap index was used. D
E
There is no annual asset management fee for this choice. See the Investment Options Guide.
1
Economic and Financial Markets Overview July 1, 2013–June 30, 2014 The U.S. economy appeared to finally gain momentum during the first half of fiscal 2014 when real gross domestic product grew an annualized 4%, but the slowest post-World War II recovery tripped up further in the fiscal year’s third quarter when real GDP fell 2.1% at an annualized rate. This was the first negative quarter in three years and prompted questions about the economic expansion’s durability. The five-year-old economic expansion has gone through many fits and starts that have limited average real economic activity to just 2.2%, while average growth over similar postwar periods has been almost double that. In the fiscal year’s third quarter, abnormally cold and snowy weather throughout much of the country drove headline economic activity downward — even as underlying consumer, housing, and business investment demand continued to grow by 1%. The third fiscal quarter — like so many before it — was representative of an economy that has been incapable of generating sustained broad-based, stronger activity in what has now become an economic expansion that matches the average expansion length of the postwar period. Even with another negative growth quarter being added to the current expansion’s unsatisfying history, there are increasingly robust leading economic indicators that the U.S. economy is entering a more sustainably stronger growth phase — one that should be similar to those experienced in the midcycle periods of the prior two long expansions. Indeed, broad economic growth rebounded to a robust 4.2% annualized rate in the final quarter of the fiscal year while growth in private domestic demand (that includes consumer spending, housing investment and business investment) returned to the 3.5% pace experienced in the first half of the fiscal year.
Gross Domestic Product/Consumer Price Index 1994–2014 Year-Over-Year Growth Rates 8% 6% 4% 2% 0% -2% -4% -6%
1994
1995
1996
1997
1998
1999
2000
2001
2002
Gross Domestic Product Note: Shaded areas denote a recession.
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Consumer Price Index
Sources: Bureau of Economic Analysis, Bureau of Labor Statistics/Haver Analytics
The U.S. economy continued its postrecession recovery, albeit at a slow pace in fiscal 2014. Leading indicators pointed to a more stable period of growth in 2015.
2
In fiscal 2015, stronger economic growth will be heavily dependent upon greater jobs and income gains. During fiscal 2014, monthly employment gains averaged 207,000 — marginally better than the average 195,000 monthly increase in fiscal 2013. The unemployment rate fell from 7.5% at the end of fiscal 2013 to 6.1% at the end of fiscal 2014 — though a large part of that decline can be attributed to an unwanted fall in labor force participation by discouraged workers opting out of the jobs market. Since the messy winter, employment gains averaged 245,000 a month through the end of fiscal 2014 and coincided with improving consumer sentiment, anecdotal accounts of better retail sales activity and hard economic data of stronger consumer spending. Income growth reaccelerated as well, with wages and salaries growth at an annualized 6.6% in the second half of the fiscal year after growing only 2.8% in the first half of the fiscal year. Further gains in jobs and income growth should help create stronger real consumer spending in the upcoming fiscal year and contribute to more robust recoveries in the housing and business investment sectors of the economy. These are areas where better growth will be needed to offset ongoing lack of contributions from the government and foreign sectors. Business orders for new capital equipment and new housing starts (particularly apartment and condominium housing starts) are showing signs of renewed surges following a slow winter. Capital equipment orders grew an annualized 11.6% in the second half of the fiscal year after being flat during the first half of the fiscal year. Meanwhile, seasonally-adjusted housing starts have moved back to one million units at an annual rate in the last quarter of the fiscal year, following a dip below 900,000 units during the worst part of winter.
The Federal Reserve has maintained a stimulative monetary policy since the beginning of the Great Recession. Policymakers at the Federal Reserve understood that they had to do everything in their power to prevent a deflationary spiral developing out of the recession — an issue stagnant Japan dealt with for two decades. Initially, the Federal Reserve drove short-term interest rates significantly lower to roughly 0% by using its main policy tool, the federal funds targeted rate, but it did not stop there. Quantitative easing has led to an expansion of assets on the Federal Reserve’s balance sheet from roughly $900 billion prior to the recession to $4.4 trillion at the end of fiscal 2014. The Federal Reserve made sure the banking system was flooded with cash for future loans that would eventually spark a credit cycle leading to even stronger economic growth. At its December 2013 monetary policy meeting, the Federal Reserve began to taper the purchases of securities from quantitative easing because the labor market was showing signs of better growth and the overall economy was finally gaining traction. At each subsequent meeting, it has reduced the size of further quantitative easing purchases so that the monetary policymakers are on track to end quantitative easing in the first half of fiscal 2015. By the end of fiscal 2015 or early part of fiscal 2016, the Federal Reserve will also begin to raise short-term interest rates through the federal funds rate. While the Federal Reserve believes the long-term neutral position for the federal funds rate is about 4%, it will likely take many years to get there. Indeed, changes to short-term interest rates should be gradual and measured through fiscal 2016 as the Federal Reserve gauges the impact from higher interest rates on jobs growth, inflation and the overall economy.
As the real economy starts to accelerate, inflation pressures will likely build even as reported inflation remains largely contained. Food and energy costs will remain volatile due to unstable supply issues, yet core rates of inflation that exclude those segments will likely edge higher in the second half of fiscal 2015 after real economic activity accelerates through the first half. After growing by a moderate 1.5% in fiscal 2013, the GDP price index (the broadest measure of economy-wide inflation) advanced by a similar pace of 1.7% in fiscal 2014 — still short of the Federal Reserve’s long-term target of 2%.
3
Economic and Financial Markets Overview (continued) July 1, 2013–June 30, 2014
Defined Contribution Asset Value by Allocation Choice As of June 30, 2014
STRS Money MarketChoice $98,815,052
STRS Total Guaranteed Return Choice 2014 $8,506,938
11.5% 9.8%
1.0% STRS Total Guaranteed Return Choice 2015 1.0% $8,463,672
STRS Total Guaranteed Return Choice 2016 $10,113,493
1.2% STRS Total Guaranteed Return Choice 2017 $9,173,034
STRS Total Guaranteed Return Choice 2018 $9,540,507
Total assets
$854,670,073
1.1%
16.6%
STRS Large-Cap Core Choice $141,580,623
16.9%
STRS Russell 1000 Index Choice $144,874,602
0.5%
STRS Russell Midcap Choice $4,113,899
18.2%
STRS Russell 2000 Index Choice $155,186,096
8.3%
STRS REIT Choice $70,745,511
1.1% STRS MSCI World ex USA Index Choice $94,568,227
11.1%
STRS Barclays U.S. Universal Bond Index Choice $84,278,639
Target Choice Options
STRS Target Choice 2025 $851,444
STRS Target Choice 2020 $9,334,773
0.14%
0.10% STRS Target Choice 2030 $1,102,325
STRS Target Choice 2035 $693,290
1.09%
0.08%
0.12%
0.06% 0.11%
STRS Target Choice 2040 $1,208,890 STRS Target Choice 2045 $574,180 STRS Target Choice 2050 $944,878
The chart above displays STRS Ohio’s defined contribution holdings and percentage of total assets for the fiscal year ending June 30, 2014. More information on these options can be found in the Performance Section beginning on Page 6.
4
Money market returns limited by low interest rates Money market returns remained low throughout the fiscal year as the U.S. Federal Reserve kept the effective interest rate at 0.0%. This rate is the most prominent factor for money market yields and is evidenced by the benchmark return of 0.06% for the 90-day U.S. Treasury bill.
Bond market rebounds in 2014 Fiscal 2014 was an up year for fixed-income market returns as credit conditions improved. In response to continued high unemployment and below potential economic growth, the U.S. Federal Reserve maintained short-term interest rates effectively at 0.0% for the entire fiscal year. Over the course of the fiscal year, the creditsensitive sectors of the bond market had the highest returns, while the less credit sensitive sectors had lower returns. The net result was a positive fixed income return of 5.04% in fiscal year 2014.
Domestic equity returns continue strong run Fiscal year 2014 saw the U.S. equity market rise for the fifth consecutive year as the economy and the financial markets continued to rebound from the financial crisis. Returns for the year were again very strong as we saw the market’s rise outpace earnings growth, reflecting increasingly higher valuation levels.
REITs post solid performance The STRS REIT Choice generated a 12.82% total return as continued recovery in property fundamentals, coupled with robust capital markets and falling interest rates provided the environment to enable these returns. Many of the leading REITs were utilizing their resources toward development of new properties and making selective acquisitions, along with disposing their older mature properties from their portfolios. These activities are typically constructive to earnings, which will support their future growth and rising dividend payments. The REITs also benefited from investor demand for high yielding securities in an expected low return environment. The REIT stocks started the first half of the fiscal year under pressure, as the 10-year U.S. Treasury bonds rose and peaked at the end of December due to investor concerns about the uncertainty of the full effect of the Federal Reserve tapering. The second half of the year was a different story, as the markets had time to adjust to the reality of tapering, the 10-year U.S. Treasury bonds declined and REIT stocks gained to finish at the 12.82% return.
International markets exceed expectations in fiscal 2014 The international markets posted a second consecutive year of strong returns, as the STRS MSCI World ex USA Index Choice gained +23.6% for the fiscal year. The best performing countries were Spain (+57.9%), Italy (+52.4%) and Denmark (+50.9%). Even the weakest markets in fiscal year 2014 showed positive returns, with Japan, Singapore and Hong Kong all at +10.1% or higher.
5
Defined Contribution Investments — Performance STRS Money Market Choice.............................................................................................Cash
Structure The STRS Money Market Choice is intended to obtain a high level of current income consistent with the preservation of principal and liquidity. The performance objective is to exceed the 90-day U.S. Treasury bill return, before fees. Investments will generally consist of U.S. dollar-denominated commercial paper and other short-term corporate obligations that are rated in the highest category (A1/P1 rating) by the rating organizations, as well as securities that are guaranteed by the U.S. government or one of its related agencies. Credit quality is emphasized for preservation of principal and liquidity. Securities selected for investment offer competitive yields and meet the policy objectives pertaining to credit quality, maturity and diversification. Interest rates and the maturity of the individual securities relative to the maturity of the portfolio as a whole are also considered.
Performance The STRS Money Market Choice returned 0.08%, after fees, for the year, compared to the benchmark 90-day U.S. Treasury bill that returned 0.06%. The choice invested mainly in U.S. government-backed Treasury bills and Agency Notes, but supplemented yields with investments in Commercial Paper and Floating Rate Corporate Bonds with maturities within 12 months. Also, holding investments with maturities longer than the 90-day benchmark contributed to slightly higher yields.
Market Drivers STRS Money Market Choice performance was 0.08%, after fees, for the year. Yields follow the current shortterm interest rates maintained by the U.S. Federal Reserve, which effectively were at 0.0% for the entire fiscal year. U.S. Government and Agency Notes made up the bulk of the investable universe with Commercial Paper and Floating Rate Corporate Bonds to a lesser extent. The table below shows the STRS Money Market Choice investment allocation:
Sector Weightings as of June 30, 2014 Sector Weight
■ U.S. Government and Agency Notes.............. 86.4% ■ Commercial Paper................................................. 10.6% ■ Floating Rate Corporate Bonds...........................2.6% ■ Money Market & Repurchase Agreements.....0.4% Total STRS Money Market Choice
100%
STRS Money Market Choice Historical Annualized Performance as of June 30, 2014 2%
1.64% 1.52%
1.5% 1% .5% 0%
0.08% 0.06% 1 Year
0.10% 0.07% 3 Years
STRS Money Market Choice
0.08% 0.10% 5 Years
Index: 90-day U.S. Treasury bill
Please see Page 1 for additional performance information.
6
10 Years
STRS Barclays U.S. Universal Bond Index Choice.......................................................Bonds Index Statistics as of June 30, 2014
Structure
The STRS Barclays U.S. Universal Bond Index Choice is intended to closely Number of Issues............ 13,350 match the return of the Barclays U.S. Universal Bond Index, before fees. Total returns are comprised of changes in principal values plus interest income Average Yield.................... 2.54% earned. The index consists entirely of U.S. dollar-denominated securities. A Average Maturity......7.56 Years significant portion of the index includes debt issued by the U.S. government Market Value......$20.67 Trillion and government-related entities, mortgage securities that include agency mortgage-backed, commercial mortgage-backed and asset-backed securities and investment grade corporate bonds. A small portion of the index is high-yield debt with ratings below the BBB category. Also included is debt from emerging market countries and other foreign issuers. The STRS Barclays U.S. Universal Bond Index Choice provides members an opportunity to earn the return of a diversified portfolio of fixed-income securities. Below are summary statistics for the Barclays U.S. Universal Bond Index:
Performance For the fiscal year ending June 30, 2014, the STRS Barclays U.S. Universal Bond Index Choice returned a positive 5.04%, after fees. This section details the performance of the Barclays U.S. Universal Bond Index. While the STRS Barclays U.S. Universal Bond Index Choice seeks to closely match the performance of its corresponding index, their actual performance will differ because the index does not incur management fees. For fiscal 2014, the most credit-sensitive spread sectors performed very well. This group was led by high yield (+11.73%), emerging market debt (+10.20%) and investment-grade corporate bonds (+7.73%). The noncredit sectors and least risky credit sectors, which represent about two thirds of the index, had positive performance but lagged the index and the most credit-sensitive sectors. This group includes government related (+4.77%), mortgage-backed securities (+4.59%) and U.S. Treasuries (+2.04%).
Market Drivers Price appreciation of fixed-income securities, combined with income from interest payments, led to the positive returns for the Barclays U.S. Universal Bond Index. The Federal Reserve has maintained the federal funds rate at 0% for 66 months and taken further direct and indirect actions to keep interest rates low and stable for an extended period of time. Directly, the Federal Reserve continued to use quantitative easing (QE) comprised of outright purchases of agency mortgages and longer-term U.S. Treasury debt. However, the Federal Reserve began to taper the QE policy, reflecting a general improvement in economic conditions. Indirectly, the Federal Reserve employs a communication policy to establish long-term monetary policy guidance including an inflation target. Previously, it communicated economic conditions were likely to keep the federal funds rate near zero until at least a 6.50% unemployment rate is sustained or the inflation rate is in excess of 2.00% beyond transitory reasons. This policy was revised in favor of qualitative guidance linked to overall labor market conditions, inflation indicators and financial conditions. Additionally, the Federal Reserve guided that it may be warranted to keep the target federal funds rate below a neutral rate for a considerable period of time. Consequently, a primary contributor to the positive fiscal year returns were declining risk premiums that helped the credit-sensitive sectors of the index achieve good results. In particular, high yield and emerging market debt, comparatively minor sectors of the market, had the highest returns in the fiscal year.
Sector Weightings as of June 30, 2014 Sector Weight
■ U.S. Government.............................................29% ■ Mortgage- and Asset-Backed....................27% ■ Investment Grade Corporates...................22% ■ High Yield............................................................ 7% ■ Emerging Market.............................................. 7% ■ Government-Related...................................... 8% Total Barclays U.S. Universal Bond Index
100%
STRS Barclays U.S. Universal Bond Index Choice Historical Annualized Performance as of June 30, 2014 5.5%
5.38%
5.04%
5% 4.5% 4%
4.94%
Please see Page 1 for additional performance information.
10 Years
Effective Nov. 3, 2008, the Lehman Brothers indexes were rebranded to the Barclays indexes.
4.04% 1 Year
3 Years
5 Years
STRS Barclays U.S. Universal Bond Index Choice
7
Defined Contribution Investments — Performance (continued) STRS Large-Cap Core Choice..................................................................................Large-Cap
Structure The STRS Large-Cap Core Choice seeks long-term capital appreciation by investing in a diversified portfolio of large-capitalization U.S. equities. The goal of the portfolio is to generate returns in excess of the Russell 1000 Index, before fees. The Russell 1000 Index represents the 1,000 largest companies traded in the U.S. markets. This choice is broad-based and well-diversified, making it suitable as a core equity holding within a portfolio. Keeping in mind that each investor’s risk tolerance is different, the amount of large-cap holdings in an investor’s portfolio should be based on risk tolerance and investment goals. The excess return for this choice is expected to come largely from stock selection and, to a lesser extent, industry or sector allocation.
Performance The STRS Large-Cap Core Choice rose 25.06%, after fees, in the fiscal year ending June 30, 2014. The fund slightly trailed the Russell 1000 benchmark, which rose 25.35% over the same period. The portfolio gained from slight outperformance in both stock selection and sector allocation; however, the outperformance was offset by the management fee.
STRS Large-Cap Core Choice Historical Annualized Performance as of June 30, 2014 30% 25%
25.06
25.35%
20%
14.15%
15%
16.62%
17.28% 19.25% 7.06% 7.84%
10% 5% 0% 1 Year
3 Years
5 Years
STRS Large-Cap Core Choice
10 Years Index: Russell 1000 Index
The performance of the benchmark is based on the Russell 200 Index until June 30, 2005, and the performance of the Russell 1000 Index after that date. Please see Page 1 for additional performance information.
8
Market Drivers The Russell 1000 Index gained 25.35% in fiscal year 2014. This marked the fifth consecutive year of gains for the U.S. equity market as the economy and the financial markets continued to rebound from the financial crisis. While the market was up again strongly in 2014, the gains were again almost primarily driven by price/earnings (P/E) expansion as market appreciation outpaced earnings growth. The sluggish profit growth reflected only moderate U.S. economic growth. Internationally, economic growth remained weak as emerging economies continued to experience slow growth. Also, widespread sovereign budgetary deficits in Europe continued to hinder growth in the European Union.
Sector Weightings as of June 30, 2014 20.97% 18.36%
Information Technology
15.58% 16.79%
Financials
14.18% 12.39% 11.55% 11.37%
Consumer Discretionary Industrials
11.01% 12.99%
Health Care
10.35% 10.12%
Energy
7.34% 8.69%
Consumer Staples Utilities Materials Telecommunications Services
3.30% 3.18% 2.94% 3.81% 2.78% 2.30%
Composition as of June 30, 2014
Top 10 Holdings
% of Total Investment Choice
Apple Inc. (AAPL)..........................................................3.47% Exxon Mobil Corp. (XOM)..........................................2.72% Chevron Corp. (CVX)....................................................1.84% Microsoft Corp. (MSFT)...............................................1.77% General Electric Co. (GE).............................................1.63% Verizon Communications (VZ).................................1.52% International Business Machines Corp. (IBM).....1.38% Schlumberger Ltd. (SLB)............................................1.38% Intel Corp. (INTC)...........................................................1.33% Procter & Gamble Co. (PG)........................................1.33% Top 10 holdings represent 18.37% of the total investment choice.
0% 5% 10% 15% 20% 25% STRS Large-Cap Core Choice Russell 1000 Index
9
Defined Contribution Investments — Performance (continued) STRS Russell 1000 Index Choice............................................................................Large-Cap
Structure Index Statistics as of June 30, 2014
The STRS Russell 1000 Index Choice is an allocation choice that is intended to closely match the performance of the Russell 1000 Index, before fees.
Total Market Value........ $20.14 Trillion
As the name implies, the Russell 1000 Index is comprised of approximately 1,000 U.S. companies selected for their large market capitalization, liquidity and industry classifications. These stocks represent 92% of the characteristics of the U.S. market.
Mean Market Value....... $21.48 Billion Weighted Average Market Value ................$110.43 Billion Largest Company Market Value.................$560.34 Billion
The STRS Russell 1000 Index Choice is a large-cap choice designed to diversify portfolio holdings and is intended to be a long-term investment option.
Smallest Company Market Value......................$1.63 Billion Median Share Price.....................$54.99
Ibbotson Associates recommends holding a large-cap equity choice as part of a well-diversified investment portfolio. Keeping in mind that each investor’s risk tolerance is different, the amount of large-cap holdings in an investor’s portfolio should be based on risk tolerance and investment goals.
P/E Ratio...............................................19.0 Dividend Yield................................. 1.9%
Performance The STRS Russell 1000 Index Choice gained 25.22%, after fees, for the fiscal year ending June 30, 2014. This marked the fifth consecutive year of positive returns and saw the Russell 1000 Index rise more than 20% for the second consecutive year.
Russell 1000 Index Values For Fiscal Year 2014 6,000
5,500
5,000
4,500
4,000
July 2013
Aug. 2013
Sept. 2013
Oct. 2013
Nov. 2013
Dec. 2013
Jan. 2014
Feb. 2014
March 2014
April 2014
May 2014
June 2014
Note: Figures in the chart above are based on Russell non-intraday values utilized for reporting in Russell index products and services. The Russell U.S. equity index values shown on most financial sites and in the media began at a later date and at a different beginning value than the original set of values shown above. While the STRS Russell 1000 Index Choice seeks to closely match the performance of the Russell 1000 Index, its actual performance will differ because the Index does not incur management fees.
10
Top 10 Holdings as of June 30, 2014
Market Drivers The U.S. equity market gained for the fifth consecutive year in 2014 as the economy and financial markets continued to recover from the declines caused by the financial crisis. The U.S. equity market, as measured by the Russell 1000 Index, rose 25.35%, above the longterm market average.
While the market was up again strongly in 2014, the gains were again primarily driven by price/earnings (P/E) expansion as market appreciation outpaced earnings growth. The sluggish profit growth reflected only moderate U.S. economic growth. Internationally, economic growth remained weak as emerging economies continued to experience slow growth. Also, widespread sovereign budgetary deficits in Europe continued to hinder growth in the European Union.
Johnson & Johnson (JNJ)....................................... 1.47%
% of Total Investment Choice
Top 10 Holdings
Apple Inc. (AAPL)...................................................... 2.78% Exxon Mobil Corp. (XOM)...................................... 2.15% Microsoft Corp. (MSFT)........................................... 1.71% General Electric Co. (GE)......................................... 1.31% Wells Fargo & Co. (WFC)......................................... 1.25% Chevron Corp. (CVX)................................................ 1.23% Berkshire Hathaway Inc. CL-B (BRK.B) .............. 1.15% JP Morgan Chase & Co. (JPM)............................... 1.08% Procter & Gamble Co. (PG).................................... 1.06% Top 10 holdings represent 15.19% of the total investment choice.
Sector Weightings as of June 30, 2014 Sector Weight
STRS Russell 1000 Index Choice
■ Information Technology........................18.36% ■ Financials.....................................................16.79% ■ Health Care.................................................12.99% ■ Consumer Discretionary........................12.39% ■ Industrials....................................................11.37% ■ Energy..........................................................10.12% ■ Consumer Staples...................................... 8.69% ■ Materials........................................................ 3.81% ■ Utilities........................................................... 3.18% ■ Telecommunications Services............... 2.30%
Historical Annualized Performance as of June 30, 2014
Total Russell 1000 Index
100%
26%
25.22%
24% 22%
19.06%
20% 18%
16.44%
16% 14% 12% 10%
8.00%
8% 6% 4% 2% 0%
1 Year
3 Years
5 Years
10 Years
STRS Russell 1000 Index Choice Please see Page 1 for additional performance information.
11
Defined Contribution Investments — Performance (continued) STRS Russell Midcap Index Choice........................................................................Mid-Cap
Structure The STRS Russell Midcap Index Choice is an allocation choice that is intended to closely match the return of the Russell Midcap Index, before fees. The Index is composed of approximately 800 stocks chosen for market size, liquidity and industry group representation. The return consists of capital appreciation plus dividend yield. This choice’s share price and total return should be expected to fluctuate within a wide range, like the performance of the overall stock market.
Performance The STRS Russell Midcap Index Choice gained 26.73% in 2014, after fees, for the fiscal year ending June 30, 2014.
Index Statistics as of June 30, 2014 Total Market Value...........$6.32 Trillion Mean Market Value..........$8.34 Billion Weighted Average Market Value .....................$12.1 Billion Largest Company Market Value................... $29.87 Billion Smallest Company Market Value......................$1.63 Billion Median Share Price.....................$49.95 P/E Ratio...............................................22.4
Market Drivers
Dividend Yield...............................1.51% Mid-cap stocks were strong performers in 2014. The key driver of performance was price/earnings (P/E) expansion, as the stock appreciation outpaced earnings growth. Slower profit growth resulted from only moderate U.S. economic improvement. Internationally, economic growth remained weak as emerging economies continued to experience lower growth rates. Also, widespread sovereign budgetary deficits in Europe continued to hinder the European Union economy.
Russell Midcap Index Values For Fiscal Year 2014 10,000
9,500
9,000
8,500
8,000
7,500
July 2013
Aug. 2013
Sept. 2013
Oct. 2013
Nov. 2013
Dec. 2013
Jan. 2014
Feb. 2014
March 2014
April 2014
May 2014
June 2014
Note: Figures in the chart above are based on Russell non-intraday values utilized for reporting in Russell index products and services. The Russell U.S. equity index values shown on most financial sites and in the media began at a later date and at a different beginning value than the original set of values shown above. While the STRS Russell Midcap Index Choice seeks to closely match the performance of the Russell Midcap Index, its actual performance will differ because the Index does not incur management fees.
12
Top 10 Holdings as of June 30, 2014
Sector Weightings as of June 30, 2014
% of Total Investment Choice
Sector Weight
Top 10 Holdings
■ Financials.....................................................20.40% ■ Consumer Discretionary........................17.12% ■ Industrials....................................................13.05% ■ Information Technology........................13.03% ■ Health Care.................................................10.35% ■ Energy............................................................ 7.09% ■ Consumer Staples...................................... 5.97% ■ Materials........................................................ 5.73% ■ Utilities........................................................... 5.68% ■ Telecommunications Services............... 1.58%
Noble Energy Inc. (NBL)............................................... 0.44%
Total Russell Midcap Index
Top 10 holdings represent 4.05% of the total index.
Applied Materials Inc. (AMAT).................................... 0.43% AON PLC (AON)................................................................ 0.42% Netflix Inc. (NFLX)........................................................... 0.42% Sempra Energy (SRE)..................................................... 0.41% The Kroger Company (KR)........................................... 0.40% Crown Castle International Corp (CCI).................... 0.39% Cigna Corp (CI)................................................................ 0.39% Forest Labs Inc. (FRX).................................................... 0.38% SanDisk Corp (SNDK)..................................................... 0.37%
100%
STRS Russell Midcap Index Choice Historical Annualized Performance as of June 30, 2014 30% 25%
26.73%
20% 15% 10% 5% 0%
1 Year
N/A
N/A
N/A
3 Years
5 Years
10 Years
STRS Russell Midcap Index Choice* *Inception date July 1, 2013. See Page 1 for additional performance information.
13
Defined Contribution Investments — Performance (continued) STRS Russell 2000 Index Choice.............................................................................Small-Cap
Structure
Index Statistics as of June 30, 2014
The STRS Russell 2000 Index Choice is intended to closely match the performance of the Russell 2000 Index. As the name implies, the Russell 2000 Index is comprised of approximately 2,000 U.S. companies selected for their small market capitalization and industry classifications. The index is reevaluated annually to remove larger companies that may distort the performance characteristics of a small-cap fund. The STRS Russell 2000 Index Choice is a small-cap choice designed to diversify investment holdings and is intended to be a long-term investment option. Ibbotson Associates recommends holding a small-cap equity choice as part of a well-diversified investment portfolio. Keeping in mind that each investor’s risk tolerance is different, the amount of small-cap holdings in an investor’s portfolio should be based on risk tolerance and investment goals.
Total Market Value...........$1.76 Trillion Mean Market Value..........$1.06 Billion Weighted Average Market Value .....................$1.80 Billion Largest Company Market Value......................$4.51 Billion Smallest Company Market Value..................... $143 Million Median Share Price.....................$20.90 P/E Ratio...............................................23.1 Dividend Yield...............................1.21%
Performance The STRS Russell 2000 Index Choice gained 23.50% in 2014, after fees, for the fiscal year ending June 30, 2014. This marked the second year of 20%+ returns for the index, but in fiscal 2014 it trailed the Russell 1000 Index, which gained 25.35% in the same time frame.
Russell 2000 Index Values For Fiscal Year 2014 6,000
5,500
5,000
4,500
4,000
July 2013
Aug. 2013
Sept. 2013
Oct. 2013
Nov. 2013
Dec. 2013
Jan. 2014
Feb. 2014
March 2014
April 2014
May 2014
June 2014
Note: Figures in the chart above are based on Russell non-intraday values utilized for reporting in Russell index products and services. The Russell U.S. equity index values shown on most financial sites and in the media began at a later date and at a different beginning value than the original set of values shown above. While the STRS Russell 2000 Index Choice seeks to closely match the performance of the Russell 2000 Index, its actual performance will differ because the Index does not incur management fees.
14
Market Drivers Investors saw small-cap stocks perform very well in 2014, primarily due to price/earnings (P/E) expansion as the stock appreciation outpaced earnings growth. The sluggish profit growth reflected only moderate U.S. economic growth.
Top 10 Holdings as of June 30, 2014
Sector Weightings as of June 30, 2014
% of Total Investment Choice
Sector Weight
Top 10 Holdings
■ Financials.....................................................22.96% ■ Information Technology........................17.86% ■ Industrials....................................................13.85% ■ Consumer Discretionary........................13.29% ■ Health Care.................................................13.27% ■ Energy............................................................ 6.36% ■ Materials........................................................ 5.11% ■ Utilities........................................................... 3.37% ■ Consumer Staples...................................... 3.15% ■ Telecommunications Services............... 0.78%
Intermune Inc. (ITMN)................................................... 0.25%
Total Russell 2000 Index
Top 10 holdings represent 2.33% of the total index.
100%
Prosperity Bancshares. Inc. (PB)................................. 0.25% Aspen Technology Inc. (AZPN).................................. 0.24% Wex Inc. (WEX)................................................................. 0.23% ISIS Pharmaceuticals (ISIS)........................................... 0.23% Tenneco Inc. (TEN)......................................................... 0.23% Polyone Corp. (POL)....................................................... 0.23% Investors Bancorp Inc. (ISBC)...................................... 0.23% Ultimate Software Group Inc. (ULTI)........................ 0.22% Brunswick Corp. (BC)..................................................... 0.22%
STRS Russell 2000 Index Choice Historical Annualized Performance as of June 30, 2014 26% 24%
23.50% 19.99%
22% 20% 18%
14.37%
16% 14% 12%
8.49%
10% 8% 6% 4% 2% 0%
1 Year
3 Years
5 Years
10 Years
STRS Russell 2000 Index Choice See Page 1 for additional performance information.
15
Defined Contribution Investments — Performance (continued) STRS REIT Choice.................................................................................................... Real Estate
Structure The STRS REIT Choice is a non-indexed choice* that invests in the public securities of real estate companies, primarily real estate investment trusts (REITs). The objective is to provide a long-term total return that exceeds the fund’s benchmark, the FTSE NAREIT Equity REITs Index, before fees.
Performance The STRS REIT Choice provided after-fee returns of 12.82%, trailing the FTSE NAREIT Equity REITs Index return of 13.21%. The FTSE NAREIT Equity REITs Index started the first half of the year by falling 3%, as interest rates rose and investors were concerned about the uncertainty of the full effect of the Federal Reserve tapering. The second half of the year was a different story, as the markets had time to adjust to the reality of tapering, interest rates declined, and REITs gained more than 16% to finish at the 13.21% return.
Sector Weightings as of June 30, 2014 14.6% 14.6%
Apartments
14.3% 14.3%
Regional Malls
13.5% 13.5%
Health Care
12.6% 12.6%
Office
9.8% 9.8%
Diversified
8.1% 8.1%
Shopping Centers
7.8% 7.8%
Lodging/Resorts
5.8% 5.8%
Self Storage Free Standing
5.1% 5.1%
Industrial
4.9% 4.9% 2.7% 2.7%
Mixed Manufactured Homes
0.9% 0.9% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% STRS REIT Choice FTSE NAREIT Equity REITs Index
*The STRS REIT Choice changed to a passively managed index return strategy on July 1, 2014, and was renamed the STRS REIT Index Choice. Information and performance through June 30, 2014, presented here are for the activelymanaged STRS REIT Choice.
16
Market Drivers
Composition as of June 30, 2014
At the property level, all property sectors continued to see improving fundamentals across all geographic markets. While demand has been modest, new developments are increasing supply, but it is relatively disciplined. Occupancy levels have increased and rents continued to rise in most sectors and geographic markets. REITs continue to take advantage of continued strong capital markets to further their strategic goals. The debt markets continued to provide attractive low rates during the year and REITs used this opportunity to strengthen their balance sheets and acquire strategically beneficial assets. Additionally, the strong transactional capital markets allowed REITs to continue to trade their nonstrategic assets to strengthen their overall core portfolios.
Top 10 Holdings
% of Total Index
Simon Property Group Inc. (SPG).................. 8.45% Public Storage (PSA).......................................... 4.01% Equity Residential (EQR)................................... 3.67% Prologis Inc. (PLD)............................................... 3.35% Health Care REIT Inc. (HCN)............................. 3.15% HCP Inc. (HCP)...................................................... 3.10% Ventas Inc. (VTR)................................................. 3.08% AvalonBay Communities Inc. (AVB).............. 3.01% Boston Properties Inc. (BXP)........................... 2.93% Vornado Realty Trust (VNO)............................ 2.92% Top 10 holdings represent 37.67% of the total investment choice.
.
STRS REIT Choice Historical Annualized Performance as of June 30, 2014 26%
23.68%
24%
24.20%
22% 20% 18% 16% 14% 12%
12.82% 13.21%
11.24% 11.93%
10%
9.60% 9.63%
8% 6% 4% 2% 0%
1 Year STRS REIT Choice
3 Years
5 Years
10 Years
FTSE NAREIT Equity REITs Index
FTSE NAREIT Equity REITs Index is effective beginning July 1, 2012. From July 1, 2007, through June 30, 2012, the Wilshire REIT float-adjusted index was in effect. From July 1, 2002, through June 30, 2007, the Dow Jones Wilshire REIT Full-Cap Index was used. Please see Page 1 for additional performance information.
17
Defined Contribution Investments — Performance (continued) STRS MSCI World ex USA Index Choice........................................................... International
Structure This allocation choice is intended to closely match the return of the Morgan Stanley Capital International (MSCI) World ex USA Index, before fees. The MSCI World ex USA Index is composed of approximately 1,003 constituent stocks in the index. The total investment return of the index is comprised of capital appreciation and dividend income. The STRS MSCI World ex USA Index Choice is intended as a long-term investment choice due to higher volatility of returns of international stocks over short-term periods. Risks of international investment include, but are not limited to, currency fluctuation, political instability and different security exchange regulations.
Performance The STRS MSCI World ex USA Index Choice gained 23.55%, after fees, for the fiscal year ending June 30, 2014. This choice has provided a five-year return of 11.26%. This section details the performance of the MSCI World ex USA Index, which is the benchmark for the STRS MSCI World ex USA Index Choice. While the STRS MSCI World ex USA Index Choice seeks to closely match the performance of its corresponding index, its actual performance will differ because the index does not incur management fees.
MSCI World ex USA Index Values For Fiscal Year 2014
6,000 5,750 5,500 5,250 5,000 4,750 4,500 4,250 4,000
18
July 2013
Aug. 2013
Sept. 2013
Oct. 2013
Nov. 2013
Dec. 2013
Jan. 2014
Feb. 2014
March 2014
April 2014
May 2014
June 2014
Country Weightings as of June 30, 2014
Market Drivers The international markets recorded a second consecutive year of robust returns as the developed markets remained strong. The best performing countries were Spain (+57.9%), Italy (+52.4%) and Denmark (+50.9%). The three weakest markets were Japan (+10.1%), Singapore (+10.4%) and Hong Kong (+17.7%). The returns in the peripheral countries of Europe were particularly strong due to a sharp decline in bond yields that helped boost sentiment. However, economic improvement in Europe was disappointing and late in the fiscal year the market increasingly expected the European Central Bank would have to pursue new measures to help reduce the potential for deflation occurring. The U.S. dollar was weaker overall versus development market currencies, so the returns of dollar-based investors such as STRS Ohio were positively impacted.
Country
% of Index
United Kingdom.................................19.38% Japan.......................................................18.30% Canada..................................................... 9.60% France....................................................... 9.15% Germany.................................................. 8.40% Switzerland............................................. 8.18% Australia................................................... 6.99% Spain......................................................... 3.32% Sweden.................................................... 2.75% Hong Kong.............................................. 2.56% Netherlands............................................ 2.43% Italy............................................................ 2.36% Denmark.................................................. 1.35% Singapore................................................ 1.29% Belgium.................................................... 1.10% Norway..................................................... 0.78% Finland...................................................... 0.77% Israel.......................................................... 0.47% Ireland...................................................... 0.27% Austria...................................................... 0.24% Portugal................................................... 0.16% New Zealand.......................................... 0.12% Greece...................................................... 0.03% Total MSCI World ex USA Index
100.00%
STRS MSCI World ex USA Index Choice Historical Annualized Performance as of June 30, 2014 25%
23.55%
20% 15%
7.21%
10%
11.26% 6.77%
5% 0%
1 Year
3 Years
5 Years
10 Years
STRS MSCI World ex USA Index Choice See Page 1 for additional performance information.
19
Defined Contribution Investments — Performance (continued) STRS Total Guaranteed Return Choice ................................................................. Balanced
Structure Unlike the other allocation options offered by STRS Ohio, this option provides a guaranteed interest rate on contributions and transfers made in a given year. In exchange for this protection against any possible negative returns, participants must “lock in” their contributions and transfers made during the year until the end of a five-year term. The interest rate is paid on the contributions and transfers until the end of the five-year term, and is credited to the account on a daily basis. The five-year term begins with the initial allocation choice and concludes on the last day of the fifth fiscal year, ending June 30. (The STRS Ohio fiscal year runs from July 1–June 30.) For example, contributions made between July 1, 2013, and June 30, 2014, are locked in at a 3.75% annual interest rate until June 30, 2018. At the end of the five-year term, the participant may make one of two choices: (1) Roll the accumulated value into a Total Guaranteed Return Choice for another five-year term, or (2) Transfer the accumulated value to other STRS Ohio allocation choices. If neither of these options is chosen, the accumulated value of the choice is automatically rolled into the Target Choice 2020. All contributions are placed into the Total Guaranteed Return Choice for the given fiscal year. • Members who make this investment choice at the beginning of the fiscal year must place all contributions into this choice for the entire fiscal year. • Members who make this investment choice during the fiscal year must transfer their entire STRS Ohio account balance into this choice. Subsequently, the participant must place remaining contributions for the fiscal year into this choice.
Annual Interest Rate for Allocations Made Between July 1, 2013–June 30, 2014: 3.75% This rate is reviewed and reset on an annual basis.
20
STRS Target Choice Options.........................................................................................Blends
Structure These allocation options target a year in the future that would roughly match a participant’s retirement date. As the target date approaches, the more conservative the investment mix becomes — moving from a substantial allocation to stocks in the early years (for greater growth opportunities) toward a higher allocation to bonds (to reduce volatility) as the target date nears. When the Target Choice reaches its target date, participants who are not going to annuitize the account for retirement must transfer the accumulated value to other STRS Ohio investment options. If no other option is chosen, the accumulated value of the choice automatically rolls into the nearest Target Choice option.
Performance Target Choice options consist of blends of other STRS Ohio allocation choices representing domestic and international equities, fixed income and real estate investments. Performance and Market Drivers for these other choices can be found on the following pages: • Bonds — see the STRS Barclays U.S. Universal Bond Index Choice on Page 7. • Domestic equities — see the STRS Russell 1000 Index Choice on Pages 10–11 and the Russell 2000 Index Choice on Pages 14–15. • Real estate — see the STRS REIT Choice on Pages 16–17. • International equities — see the STRS MSCI World ex USA Index Choice on Pages 18–19.
Compositions as of July 1, 2014 STRS Target Choice 2020 32% Domestic Equities 24.5% International Equities 38.5% Fixed Income 5% Real Estate
STRS Target Choice 2025 36.5% Domestic Equities 27.5% International Equities 31% Fixed Income 5% Real Estate
STRS Target Choice 2030 41% Domestic Equities 30.5% International Equities 23.5% Fixed Income 5% Real Estate
STRS Target Choice 2035 45.5% Domestic Equities 33.5% International Equities 16% Fixed Income 5% Real Estate
STRS Target Choice 2040 Performance for Fiscal Year 2014 25% 20% 15%
14.93
16.33%
20.03% 20.03% 20.03% 17.74% 19.17%
STRS Target Choice 2045 49% Domestic Equities 36% International Equities 10% Fixed Income 5% Real Estate
10% 5% 0%
49% Domestic Equities 36% International Equities 10% Fixed Income 5% Real Estate
2020
2025
2030
2035
2040
2045
2050
STRS Target Choices* *Inception date July 1, 2013. See Page 1 for additional performance information.
STRS Target Choice 2050 49% Domestic Equities 36% International Equities 10% Fixed Income 5% Real Estate
21
Defined Contribution Investments — Disclosures STRS Ohio allocation choices are not publicly traded mutual funds. They are available only through participation in the STRS Ohio Defined Contribution and Combined Plans. Asset Management Fee Example: Members who participate in the STRS Ohio Defined Contribution or Combined Plan are charged asset management fees annually, with the exception that no separate fee is charged for participation in the Total Guaranteed Return Choice. The following table provides an example of the annual fees you would incur on a hypothetical investment of $1,000 in each STRS Ohio account. The fees are taken from the net asset value of each account each valuation day. For the purpose of this example, to calculate annual fees the total fee is multiplied by the yearend account balance in that option. The table assumes (a) continuation into future years of the applicable STRS Ohio fee; (b) a 5% annual return; and (c) disbursement at each time period shown. This example should not be considered a representation of past or future expenses. Actual expenses may be greater or lesser than shown, depending upon factors such as actual performance.
portion of the Combined Plan for a period of 120 consecutive days are deemed inactive. Inactive members with account balances of less than $5,000 are assessed a $10 monthly fee taken proportionately from the balance of their account. If this fee is charged, the $10 quarterly account fee is waived. Contributions: The State Teachers Retirement System of Ohio (STRS Ohio) is a statewide pension plan for Ohio educators that operates by the authority of the Ohio General Assembly, and benefits are provided under Chapter 3307 of the Ohio Revised Code. Employers submit member and employer contributions to STRS Ohio after each payroll. For members enrolled in the STRS Ohio Defined Contribution or Combined Plan, member and employer contributions are deposited in each member’s account according to plan design and invested according to the member’s current contribution allocation within five days of receipt. Allocation Option Composition:
STRS Money Market Choice
$1
$3
$6
$13
STRS Barclays U.S. Universal Bond Index Choice
$2
$5
$9
$20
The top 10 holdings, asset allocation, major market sectors and geographical diversification included for some allocation options are presented to illustrate examples of the diversity of the available choices. The illustrations may not be representative of the choices’ current or future investments. The figures presented are as of date shown and may change at any time.
STRS Large-Cap Core Choice
$3
$10
$17
$40
Value of Assets/Account Value:
STRS Russell 1000 Index Choice
$1
$3
$6
$13
STRS Russell Midcap Index Choice $1
$3
$6
$13
STRS Russell 2000 Index Choice
$1
$3
$6
$13
STRS REIT Choice
$5
$17
$29
$66
STRS MSCI World ex USA Index Choice
$2
$7
$12
$26
STRS Total Guaranteed Return Choice
$0 $0 $0 $0
The performance of the allocation choices made by members is used upon distribution to determine funds accumulated. Each allocation option is valued each valuation day. Each option is determined by unit values. The unit value reflects performance and expenses. The account value is based on the unit value, at the end of each valuation day, and the number of accumulated units of each allocation option. STRS Ohio will use market quotations, amortized cost or “fair value” to determine the unit value of each allocation option. Securities lending, litigation settlement and other miscellaneous income will not be included in the unit value of any allocation choice. Investment return and principal value will fluctuate so that a member’s units, when redeemed, may be worth more or less than their original cost.
1 Year 3 Years 5 Years 10 Years
Account Fee: In addition to the fees listed above, a quarterly account fee of $10 is charged to each participant in a Defined Contribution or Combined Plan. The fee is taken proportionately from the member’s account balance on the first business day of the quarter. Maintenance Fee for Inactive Accounts Less Than $5,000: Members who have not contributed to the Defined Contribution Plan or the defined contribution
22
Internet Capabilities: Nationwide Retirement Solutions (NRS) will maintain an Internet website accessible through www.strsoh.org for the benefit of STRS Ohio members participating in the STRS Ohio Defined Contribution Plan or the defined contribution
portion of the Combined Plan. Services and information available to participants include access to account balance, current contribution allocation, allocation option information and educational materials. Members will also be able to change future contribution allocations and perform exchanges among available allocation choices. Members are required to enter a Social Security number and personal password. Written confirmations will normally be mailed to members within two business days of conducting transactions. Members should verify the accuracy of Internet transactions immediately upon receipt of the confirmation. While the website is typically available 24 hours a day, seven days a week for these services, NRS cannot guarantee availability. NRS is not responsible for any gain or loss attributable to these website services being unavailable. Members must accept the NRS Electronic Service Agreement in order to use the site. Voice Response: NRS will maintain a voice response system for the benefit of members participating in the STRS Ohio Defined Contribution Plan or the defined contribution portion of the Combined Plan. Services and information available to participants include access to account balance, current contribution allocation, allocation option information and how to change your Personal Identification Number (PIN). Members may make exchanges among available allocation options and change future contribution allocations through the voice response system or by speaking to a customer service representative at NRS. Members are required to enter a Social Security number and PIN. Verbal instructions given to a customer service representative will be accepted upon verification of member identity and will be recorded to verify accuracy. Written confirmations will normally be mailed to members within two business days of conducting transactions. Members should verify the accuracy of phone transactions immediately upon receipt of the confirmation. While the voice response system is typically available 24 hours a day, seven days a week for these services, NRS cannot guarantee availability. NRS is not responsible for any gain or loss attributable to these voice response services being unavailable. The tollfree voice response line can be reached by calling 1-866-332-3342. Transfers and Allocation Changes Among Investment Options: Members may conduct exchanges daily by phone or via the Internet unless exchange restrictions apply. Verbal instructions will be accepted upon verification of member identity and will be recorded to verify accuracy.
Exchange instructions completed by 4 p.m. Eastern Standard Time on a business day are posted to a member’s account at the closing price that day or, if the day of the exchange is not a business day, at the closing price on the next business day. Members may change their future contribution allocation and make exchanges among available allocation options without charge. Members are permitted 20 trade events each calendar year. A trade event is defined as any trade or combination of trades occurring on a given valuation day. NRS also provides these additional safeguards to protect STRS Ohio from illegal lateday trading and improper market-timing trading. • If six or more trade events occur in one calendar quarter, NRS will notify the participant by U.S. mail that he or she has been identified as engaging in potentially harmful trading practices. • Following this notification, if more than 11 trade events occur in two consecutive calendar quarters, NRS will require the participant to submit all future trade requests in paper form only via regular U.S. mail for the remainder of the calendar year. • If 20 trade events occur in a calendar year, NRS will require the participant to submit all future trade requests in paper form via U.S. mail for the remainder of the calendar year. Member Reporting: Members in the Defined Contribution Plan and the defined contribution portion of the Combined Plan will receive a quarterly statement of their account. Statements are mailed to members by the 20th business day of the month following the end of a quarter. Statements include beginning and ending balances, deposits, gains and losses, transactions, fees, contribution election and asset allocation information. Contributions posted to your account after the close of a quarter will not appear on that quarter’s statement. Each fall, members in the Combined Plan will also receive an Annual Statement of Account from STRS Ohio that includes their projected retirement, survivor benefit, disability and service credit assuming the member meets or will meet the eligibility requirements for the defined benefit portion of the account. Please review all quarterly statements carefully and inform NRS of any discrepancies within 120 days of the close of the calendar quarter in which the discrepancy occurs. Failure to do so may result in the inability to adjust your account.
23
Defined Contribution Investments — Glossary of Terms Disbursements: In accordance with state law, disbursements to members may be made only if the member has terminated STRS Ohio contributing service. Additionally, disbursements may be made only at the times and under the circumstances allowable by the Internal Revenue Code. The Defined Contribution and the Combined Plans do not allow loans or hardship withdrawals. Members may take payment from the Defined Contribution Plan or the defined contribution portion of the Combined Plan through a rollover, a lump-sum withdrawal or a variety of annuities. Units will be redeemed from allocation choices on the business day after processing of the payment request is complete. Disbursements can be sent to the member or to the member’s financial institution. Members may request additional information or forms for disbursement by calling an STRS Ohio member service representative toll-free at 1-888-227-7877.
Glossary of Terms Barclays U.S. Universal Bond Index
The Barclays U.S. Universal Bond Index measures publicly issued U.S. dollar-denominated, fixed-rate taxable bonds on a total return basis. It consists of approximately 14,000 different issues and includes fixed-income securities that are rated either investment grade or below investment grade. Municipal debt, private placements and nondollar issues are excluded from the index.
benchmark
A standard, usually an unmanaged index, used for comparative purposes in assessing a fund’s performance.
bond
A debt instrument issued by a company, city or state, or the U.S. government or its agencies, with a promise to pay regular interest and return the principal on a specified date.
Members investing in the STRS Total Guaranteed Return Choice are subject to an early-term withdrawal penalty for lump-sum payments of monies that have not reached five years in maturity. Members selecting an annuity option are not subject to an early-term withdrawal penalty for monies in the STRS Total Guaranteed Return Choice.
bond credit rating
Members who request disbursement should be aware that the unit values of their account will remain subject to changing market conditions pending the receipt and processing of the disbursement.
book/price ratio
Members who receive distributions will receive applicable tax statements. Members should file this tax statement with their income tax return. Members should always consult their accountant, lawyer or tax adviser for individual guidance.
The net worth or liquidating value of a business. This is calculated by subtracting all liabilities, including debt and preferred stocks, from total assets.
Inability to Conduct Business: NRS is available to execute transactions 24 hours a day, seven days a week through its voice response system and Internet website during normal working conditions. Although NRS has a comprehensive contingency plan for both power failures and phone service interruption, abnormal circumstances could occur due to events such as severe weather conditions, natural disasters or inevitable accidents such that NRS may not be able to execute investment transactions. During this time of emergency, NRS will strive to restore normal business functions in a timely manner.
24
Independent evaluation of a bond’s creditworthiness. This measurement is usually calculated through an index compiled by companies such as Standard & Poor’s (S&P) or Moody’s. Bonds with a credit rating of BBB or higher by S&P or Baa or higher by Moody’s are generally considered investment grade. The current book value of a stock divided by its current market price.
book value
bottom-up approach
The search for outstanding performance of individual stocks before considering the impact of economic trends. Such companies may be identified from research reports, stock screens or personal knowledge of the products and services.
business day/valuation day
A day when market exchanges are open for business.
capital appreciation
The increase in the share price and value of an investment.
diversification
The strategy of investing in a wide range of companies, industries or investment products to reduce the risk if an individual company or sector suffers losses.
dividend yield
The current or estimated annual dividend divided by the market price per share of a security.
economic sectors Consumer Discretionary
Includes industries likely to be most sensitive to economic cycles, including automotive, apparel, household durable goods, hotels, restaurants and consumer retailing.
onsumer Staples C This sector includes industries that are less sensitive to economic cycles, including food, beverage and tobacco manufacturers, producers of nondurable household goods, and food and drug retailing companies.
Energy
Contains companies involved in producing, marketing or refining gas and oil products.
inancials F Includes companies engaged in finance, banking, investment banking and brokerage, insurance, corporate lending and real estate.
Health Care
Includes manufacturers of health care equipment and supplies, providers of health care services and producers of pharmaceuticals.
Industrials
This sector includes companies involved in construction, engineering and building, aerospace and defense, industrial equipment and machinery, and transportation services and infrastructure.
I nformation Technology Contains companies primarily involved in technology software and services, hardware and equipment, and manufacturers of semiconductors. Materials
Includes companies that manufacture chemicals; construction materials; glass; paper products; and metals, minerals and mining companies.
elecommunications Services T Contains companies involved in communication services, including wireless, cellular and highbandwidth networks.
Utilities
Includes gas, water and electric utilities, as well as companies that operate as independent producers or distributors of power.
float
The number of shares of a corporation that are outstanding and available for trading by the public. A small float means the stock will be volatile, since a large order to buy or sell shares can influence the stock’s price dramatically. A larger float means the stock will be less volatile.
index return
An investment choice designed to closely match performance and composition of a particular market benchmark, such as the Russell 1000 Index.
interest rate
The rate of interest charged for the use of money, usually expressed as an annual rate.
liquidity
The ability to easily turn assets into cash. An investor should be able to sell a liquid asset quickly with little effect on the price. Liquidity is a central objective of money market funds.
market capitalization (large-cap, mid-cap, small-cap)
The market price of a company’s shares multiplied by the number of shares outstanding. Large capitalization (large-cap) companies generally have more than $5 billion in market capitalization; midcap companies between $1.5 billion and $5 billion; and small-cap companies less than $1.5 billion. These capitalization figures may vary depending upon the index being used and/or the guidelines used by the portfolio manager.
market value
The price at which a security is trading and could presumably be purchased or sold. This also refers to what investors believe a firm is worth, calculated by multiplying the number of shares outstanding by the current market price of a firm’s shares.
market value-mean
The market value of a group of securities computed by calculating the arithmetic average of a sample.
25
Defined Contribution Investments — Glossary of Terms (continued) market value-weighted
credit risk
maturity
currency risk
The market value of a group of securities computed by calculating a weighted average of the returns on each security in the group where the weights are proportional to outstanding market value. The final date on which the payment of a debt instrument (e.g., bonds, notes, repurchase agreements) becomes due and payable. Short-term bonds generally have maturities of up to five years, intermediate-term bonds between five and 15 years, and long-term bonds more than 15 years.
MSCI World ex USA Index
The MSCI (Morgan Stanley Capital International) World ex USA Index is a free float-adjusted market capitalization index of approximately 1,003 foreign companies that is designed to measure developed market equity performance, excluding the United States.
net asset value (NAV)
The market value of one unit of an investment option on any given day. It is determined by dividing an investment option’s total net assets by the number of units outstanding.
price/book ratio
The current market price of a stock divided by its book value or net asset value.
price/earnings ratio (P/E)
The current market price of a stock divided by its earnings per share. Also known as the “multiple,” the price-to-earnings ratio gives investors an idea of how much they are paying for a company’s earning power and is a useful tool for evaluating the costs of different securities.
price/sales ratio
The current market price of a stock divided by total sales.
Risk country risk
The possibility that world events, such as political instability, financial troubles or natural disasters, will adversely affect the value of securities issued by companies in foreign countries.
26
A loss in value due to a bond issuer’s failure to make timely interest and principal payments or adverse perception of the issuer’s ability to make such payment. The possibility an investment’s value will change due to changes in currency exchange rates.
income risk
The possibility income will decline because of falling interest rates.
industry concentration risk
Investments concentrated heavily in specific industries could trail the overall market.
interest rate risk
The risk that values will fall with changes in interest rates.
investment style risk
The chance that returns from a designated investment style will trail returns from the overall stock market.
manager risk
The possibility that poor security selection will cause underperformance relative to the benchmark.
purchasing power risk
The possibility principal and interest won’t be worth as much in the future because of their erosion in the value due to inflation.
stock market risk
The possibility that stocks will experience losses due to factors that affect the overall performance of the financial markets.
risk tolerance
How sensitive you are to market losses.
Russell Indexes
These indexes are used as standards for measuring U.S. stock market performance. An example would be the Russell 3000, which is the most widely used broad market index for U.S. institutional investors. It is comprised of the largest 3,000 U.S. stocks, representing 98% of investable U.S. equity.
stock
An ownership share in a corporation. Each share of stock is a proportional stake in the corporation’s assets and profits, and purchasing a stock should be thought of as owning a proportional share of the successes and failures of that business.
top-down approach
The method in which an investor first looks at trends in the general economy, selects attractive industries and then companies in those industries that should benefit from those trends.
tracking error
A portfolio volatility measurement that compares the variation (measured by the standard deviation) of the difference between the performance of the benchmark and a particular fund.
Treasury securities
Negotiable debt obligations of the U.S. government, secured by its full faith and credit. The income from Treasury securities is exempt from state and local income taxes, but not from federal income taxes. There are three types of Treasuries: bills (maturity of three–12 months), notes (maturity of one–10 years) and bonds (maturity of 10–30 years).
volatility
The general variability of a portfolio’s value resulting from price fluctuations of its investments. In most cases, the more diversified a portfolio is, the less volatile it will be.
yield
The annual rate of return on an investment, as paid in dividends or interest. It is expressed as a percentage obtained by dividing the market price for a stock or bond into the dividend or interest paid in the preceding 12 months.
27
60-607, 12/14/20M